Diminished Outlook For Malaysia Buildings Growth

Malaysia's residential and non-residential buildings sector will grow by 4.4% in real terms in 2018 and at an annual average of 3.7% between 2018 and 2027, a relative slowdown from the 6.0% growth seen in 2017.

The cancellations and suspensions of major rail projects, including the Singapore-Kuala Lumpur High-Speed Railway and the East Coast Rail Link, reduces the potential for real estate development along the route that we previously factored into our forecast.

Ongoing investigations into the 1MDB investment fund, as well as Prime Minister Mahathir Mohamad's pledge to review Chinese investments, could also lead to greater scrutiny of residential, commercial and industrial real estate projects.

Overall growth in buildings construction remains relatively robust, supported by Malaysia's stable economic expansion and lower-risk environment compared to the rest of South East Asia.

Forecast Changes

We have revised down our growth outlook for Malaysia's residential and non-residential buildings sector in the wake of the new Pakatan Harapan's suspension or cancellation of several large-scale rail projects and the ongoing corruption investigations into 1MDB investments, which include real estate projects. We now forecast that Malaysia's buildings sector will grow by 4.4% in real terms in 2018 and at an annual average of 3.7% between 2018 and 2027, compared to our previous forecasts of 5.4% and 4.7%, respectively.

The recent suspensions and cancellations of, and revisions to major rail projects in Malaysia dampens the outlook for residential and commercial real estate development. Our earlier forecasts were predicated on the Singapore-Kuala Lumpur High-Speed Railway, the East Coast Rail Link and the expansion of the LRT and MRT systems in Kuala Lumpur, all of which would have driven residential and commercial development along their routes. Since the surprise victory of the Pakatan Harapan coalition in the May elections, Mahathir has announced the cancellation of the high-speed railway, suspended work on the East Coast Rail Link, and downsized the LRT3 project in Kuala Lumpur ( see 'Construction Growth Revised Down On High-Speed Rail Cancellation', May 30).

Planned and ongoing large-scale real estate developments, particularly those sponsored by the 1MDB investment fund or ones involving Chinese investors, are likely to come under scrutiny. A major issue during the May elections was corruption allegations surrounding 1MDB and former Prime Minister Najib Razak. Work on the MYR7.8bn (USD1.9bn) Tun Razak Exchange in Kuala Lumpur, which was being built by a 1MDB subsidiary, was briefly suspended in May and June although the government has since said it would bail out the largely completed project. Earlier-stage projects liked to 1MDB such as the Bandar Malaysia complex may be significantly altered or cancelled. Projects backed by Chinese companies or investors could also come under scrutiny, with Mahathir criticizing the Forest City complex in Johor during the campaign period and pledging to review all China-backed projects in the country.

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At the same time, stable economic growth in the country will continue to provide baseline support for investment in residential, commercial and industrial projects; our Country Risk team expects that real GDP growth in Malaysia will reach 5.8% in 2018 and 4.5% in 2019. During the campaign, Pakatan Harapan also pledged to build 1 million affordable housing units over two terms which, if implemented, will also represent a meaningful boost to residential construction activity.